U.S. Hotel Transactions Hot Market

U.S. Hotel Transactions Hot Market

Private equity funds are fueling activity in the U.S.
hotel transactions market, including for such well-known
companies as Four Seasons and LaQuinta.

“The lingering question on investors’ minds
is how to maximize yield in a capital-induced frenzy
that continues in the face of lowered revenue growth
expectations, increasing upward pressure on operating
costs, and questionable exit expectations further out
on the investment horizon,” said Scott Smith MAI,
vice president in the Atlanta office of PKF Consulting,
of the survey.

“Historically, market expansions abruptly concluded
with recession and either war, catastrophic event, or
both. With no clear signs of a recession brewing and
considering the unpredictability of catastrophic events,
the most likely reason why hotel ADRs and asset prices
will come down is supply expansion,” said Smith,
citing the 2007 “Hospitality Investment Survey” published
by PKF Hospitality Research.

Despite fears of rising interest rates and Federal Reserve
actions, the cost of financing continues to fall. The
interest rate for hotel loans stands at less than 7 percent
for the first time since the annual survey was started
in 1988.

“In this kind of environment, where returns are
highly dependent on operating revenues, investors need
to carefully evaluate and selectively invest in those
projects that promise adequate returns,” recommends
Dr. John B. Corgel, PKF Hospitality Research senior advisor.

“If construction costs continue to grow at rates
exceeding inflation and property value increases, it
is reasonable to assume that existing hotels will be
virtual money-printing machines over the next few years.
Investors should have great difficulty matching the dividend
return on hotels compared to other property types,” Corgel
observed.

“On the other hand, should construction costs
decline by 5 to 10 percent, the potential exists for
the supply growth to exceed demand growth during the
next two years,” he warned.